One cannot escape from the reality of a home loan. About a generation ago, one could buy a land and build a house with a few years’ savings. Today, it takes about a quarter of a lifetime to own a property. You can no longer use your savings to purchase an entire property; this is the inevitable reality. You have no option but to rely on banks and institutions to help you meet the debt of purchasing a property. There are ingenious ways for smart homeowners to reduce their interest burden and lessen the loan tenure. Here are some top tips in managing your home loan EMIs smartly:
1) Pay Higher EMIs
Even a 5% increase in EMI can make a huge impact in your home loan tenure and interest. Deciding on an affordable EMI is important, but this does not mean that paying a lower EMI amount over an extended period of time should be your goal. The interest component of home loans is a huge one. Therefore, aim for reducing the tenure and the interest.
2) Choose A Lower Interest Rate
Be smart and vigilant in shopping for loan transfers. By transferring your remaining loan amount to another lender, you can bag a lower rate of interest. It is important that you compare and analyse various schemes thoroughly. It has become common for banks to reduce their interest rates because of the different interest reset periods. Although transferring your loan requires that you go through the entire legal paperwork again, it is a trouble worth taking.
3) Make A Prepayment Every Year
By paying an EMI before its official due date, you can lower the remaining principal amount. Most banks allow partial prepayment, although some of them will apply charges to it. It is common for borrowers to use their incentive and bonus amounts for prepayments. It may sound like a bit of a rash step, but prepayments will bring in more benefits in the long run by reducing your debt-to-income ratio.
4) Create An EMI Contingency Fund
You should always opt for creating a contingency fund to deal with unforeseen circumstances. A contingency fund can be 3 or 6 months EMI corpus and should never be utilized. One good way of setting aside the contingency fund would be by investing in liquid funds. In any case, most home loans are covered by term insurance plans.
5) Opt For EMI Holiday Only When Necessary
EMI holidays come to the rescue when a financial crisis hits hard. In case of a financial problem, discuss with your bank rather default on the EMI. Banks consider your payment record and, when convinced that your problem is genuine, may give you EMI holiday for up to 3 months. Remember, a payment default impacts your CIBIL score negatively. On the other hand, an EMI holiday is a boon to borrowers facing short-term financial troubles. In most cases, you can avail it once or twice during the tenure of the home loan.